That’s what a lot of people are wondering (which has the built in assumption that this is a bear market rally and not the real thing). To get some perspective on this, I decided to look at a long term view of the Nasdaq Composite Bullish Percent Index.

If you’re unfamiliar with this type of index, it is created by looking at what percentage of the components of an index (in this case the Nasdaq Composite) are exhibiting a certain bullish pattern according to point and figure charting. To see how I use this as an indicator, check out: How to Time the Market with Bullish Percent Charts.

Here’s the long term chart of the Nasdaq Composite compared to its Bullish Percent Index:

By the way, I used the Nasdaq Composite because it is very broad with about 3000 components and it excludes a lot of the junk found in the NYSE (CEFs, convertible debentures, ETFs, preferred stocks, rights, warrants, etc.) which can skew the index, especially because of their sensitivity to interest rates.

The chart shows the tech bear market and the latest one which started in late 2007. Almost every single bear market rally top was flagged by the Bullish Percent Index (BPI) - indicated by the red down arrows. It also did a good job of finding exhaustion points during the good times - with one important exception.

The red box shows the span of time that the BPI went above 60% and stayed there. During this time, the normal relationship we otherwise see between the two charts broke down. The only argument I could think of to explain this, is that this time period was the start of a new (albeit short lived) bull market. All kinds of indicators, breadth readings and overbought metrics went into the red zone and stayed there as the stock market powered ahead - seemingly oblivious to them.

The other difference between this most recent bear market and the last is that the counter rallies we’ve seen this time around have been much less powerful than before. As you can see marked by the orange down arrows, they don’t even reach 50% BPI.

The latest BPI reached slightly higher than 62% - that the highest since early 2007 and before than, early 2004. Obviously, this latest run up is different from the previous ones. Going back to 1996 (not shown on the chart) it was rare for the Nasdaq Composite Bullish Percent Index to reach or exceed 50%. So this level is clearly significant.

So what we have to consider is, if this is just a run of the mill bear market rally, then it is over. But if it the real thing, similar to what we saw in 2003 (the red box) then the market will confound everyone and keep going higher.

According to the long term market direction guide known as the Coppock Curve, the Nasdaq is already on a buy signal (from last month). But since it tends to whipsaw much more than the Standard & Poor’s 500 Index (SPX), I’m waiting until it gives a signal. There are only 8 more trading days left in the month and if the S&P 500 can stay above 874 (3.74% lower from Tuesday’s close) then the Coppock Curve curls up.

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March 2003 was not the start of a new bull market, October 2002 was. Shorting the BPCOMPQ spike in December 2002 was still plenty profitable for traders, even though it was the start of a long-lasting bull.

I’m just not seeing that many parallels between March 2003 and March 2009, other than the wedge price pattern, so my current bet is that the pattern ends differently. I can stop out without too much damage if my roadmap is wrong and the market keeps following the 2003 pattern.

I’m always suspicious of graphs with up and down arrows that are drawn after the fact. What is the signal that tells you to draw the arrow other than the fact that the graph changed direction? But by the time you know the graph changed direction it is often too late.

One standard way of creating signals is to look at crossovers of the graph with its N-bar moving average. Is there an N-bar moving average of the BPI that gives reasonably reliable signals?

Douglas, I mentioned Hussman’s studies re the pattern of volume in bear market rallies. Take a look. But also, there’s a cyclical nature to volume - we’re are now entering the slow summer months.

Jim, you say tomato, I say tomAto

Russ, valid point. I’m showing a back of the envelop sketch to convey the idea not to demonstrate a quantified edge. Having said that, I’m sure you can massage an N to give you the right signal. I prefer to eyeball it. Fallond uses a moving average cross-over (see his stockcharts public charts).